Article 111 of the Venezuelan Income Tax Law (VITL) establishes that taxpayers carrying out transactions with related parties must determine their revenues, costs and deductions by considering the prices or amounts that would have been used with or between independent parties in comparable transactions.

Article 112 of the VITL states that the determination of costs and deductions of imported goods and services, as well as the taxability of export-derived revenues regarding transactions conducted with related parties, will be performed taking into account the transfer pricing methodology established in the VITL. In addition, taxpayers are required to prepare and keep, for a certain period of time specified in the law, the documentation describing the accurate application of the transfer pricing regulations, including elements such as description of assets used to generate income, description of business activities, a detailed list of inter-company transactions and methodologies.

Taxpayers are required to prepare the transfer pricing documentation and provide it when requested by the Servicio Nacional Integrado de Administración Aduanera y Tributaria (SENIAT). Although there is no specific deadline for its completion, taxpayers should have it ready by the time they are obliged to file the informative return.

There is no obligation in the VITL to file the transfer pricing documentation.

There are no specific TP regulations for transactions between domestic related parties. However, according to article 117 of the VITL, TP documentation requirements and regulations are applicable to transactions carried out through domestic or foreign intermediaries considered non-related parties if those non-related parties in turn carry out transactions with a foreign company considered a related party.

According to article 119, the VITL assumes, unless opposing evidence is available, that transactions carried out between individuals or legal entities with residence or domiciled in Venezuela and persons or legal entities with residence or domiciled in low-tax jurisdictions, are transactions between related parties. Therefore, they are subject to transfer pricing rules.

Taxpayers should use a transfer pricing informative tax return (Form PT-99) to inform the tax administration of transactions with related parties abroad carried out during the fiscal year.

Taxpayers must file the informative return within six months of the fiscal year end. Those with a fiscal year according to the calendar year are obliged to submit the informative return by June following their fiscal year end. Those with a fiscal year end different from the calendar year must submit the informative return within six months of their fiscal year end.

There are no exceptions in the VITL for the application of transfer pricing rules.

The arm's-length principle

Comparability criteria should be taken into account when analysing and comparing transactions with related parties to similar transactions carried out by non-related parties. The criteria considered by the VITL are:

• transaction characteristics;

• economic functions or activities;

• contractual terms;

• economic circumstances; and

• business strategies.

In Venezuela there are significant economic and regulatory conditions that have a significant impact on how inter-company transactions are priced and tested. These include foreign exchange and interest rate controls, as well as price caps. The application of the arm's-length principle should take these conditions into consideration in order to assure comparability and full compliance with the rules.

Article 136 of the VITL provides five transfer pricing methods:

• comparable uncontrolled price;

• resale price;

• cost plus;

• profit split; and

• transactional net margin.

The method used in the application of the arm's-length principle is essential as it leads to the determination of the income or deductions applicable to the transaction being evaluated.

Although there are no regulations regarding a best method rule, according to article 142 of the VITL the comparable uncontrolled price method must be considered as the first option by taxpayers when evaluating transactions regarding the transference of goods, services or rights.

In order to determine the price to be used between independent parties, a price or profit margin range resulting from the application of a method with different comparable transactions or from the application of different methods may be used.

The VITL establishes the possibility of applying reasonable adjustments which, depending on the transaction, can be based on the following elements:

• products and services characteristics;

• intangibles characteristics;

• functions, assets and risks involved;

• business strategies; or

• economic circumstances.

The tax authorities accept foreign comparables data since there is not enough information from local comparables. It is important to perform adjustments to account for the differences between comparables and the Venezuelan taxpayer. No regulations have been issued regarding the use of internal data.

The SENIAT has not yet resorted to the use of secret comparables in transfer pricing cases. There is no provision in the law regarding their use.

Penalties

Failure to comply with transfer pricing regulations may result in a rejection of deductions associated with payments performed to related parties abroad and a tax audit with respect to transfer pricing. In the event of a non-legitimate reduction in the taxable revenue due to the taxpayer's omission, a 25% to 200% fine of the omitted tax will be applicable. In addition, taxpayers having tax adjustments may result in double international taxation.

Moreover, if a company does not have the transfer pricing documentation required by Article 169, a 300 to 500 tax unit ($6,434 to $10,724) fine will be applicable provided that the transfer pricing methodology established by the VITL has not been used.

Regarding the informative return and according to Article 103 of the Organic Tax Code (OTC), taxpayers that do not submit the informative return will receive a fine ranging from 10 to 50 tax units ($214 to $1,072). Those whose submissions are incomplete or out of date will receive a fine ranging from 5 to 25 tax units ($107 to $536).

Additional regulations

According to the VITL, unilateral and bilateral APAs are available. Multilateral APAs are not explicitly available in the VITL. However, it is reasonable to explore the possibility of multilateral APAs as Article 115 of the VITL contemplates the application of the OECD Transfer Pricing Guidelines, which include guidelines for this type of agreement. No APAs have been issued in Venezuela yet.

Although there are no specific rules forbidding cost-sharing agreements, the VITL contemplates several rules that could provide arguments to the SENIAT for rejecting the deductions derived from this structure. If a deduction were to be permitted, cost-sharing payments would be subject to a withholding tax depending on the nature of the agreement according to the VITL. Under international tax treaties, this could be challenged.

Venezuelan thin capitalisation rules are the most rigorous in Latin America, with a limit of 1:1 debt-to-capital ratio. Interest payments to related parties corresponding to inter-company loans exceeding this limit are non-deductible. Moreover, according to a recent reform of the VITL effective since April 2007, debt in excess of the thin capitalisation rule will be treated as net worth for all legal purposes. This same rule applies for inter-company debt that is not contracted under market conditions, even if the total amount of the taxpayer's debts does not exceed the amount of its net worth.

Transfer pricing rules regarding intangibles in the VITL focus only on the characteristics that have to be taken into account in order to apply a correct comparability with non-related party transactions. These include, among others, the type of property (industrial or intellectual), level of protection and expected benefits.

Transfer pricing rules regarding inter-company services in the VITL focus only on the characteristics that have to be taken into account in order to apply a correct comparability with non-related party transactions. These characteristics are the nature and duration of such services.

There are no specific rules regarding inter-company interest transactions, although the general rule of agreement terms should be applied.

There are no specific rules regarding stock sales, although general transfer pricing rules apply.

Audits

There is no public information regarding how the SENIAT programmes transfer pricing audits. However, since May 2007, several taxpayers have been receiving transfer pricing information requests, which include information that will probably be used by the SENIAT to establish a profit range by industry. With this, the SENIAT may analyse the profitability and income tax payments of the taxpayer and determine if any inconsistencies exist. Additionally, the SENIAT has been requesting information on custom duties, which it may use to compare it to the taxpayer and other taxpayers' transfer prices.

Transfer pricing audits started in Venezuela at the beginning of 2007. Inspections are being performed in the energy, automotive and banking sectors. Of the known cases, an oil and gas company was subject to inspection with a tax assessment levied for approximately $17.7 million, based on a review of its financing operations for 2005.

Furthermore, in a case related to an automotive company, the SENIAT contested the inter-company purchases of raw materials for production and determined a transfer pricing adjustment of approximately $1.1 million.

There is no information available regarding the transactions that the SENIAT is likely to audit, although intangibles and services are expected to be the main subjects.

Since audits started very recently, there is no official or defined position taken by the SENIAT.

Having sufficient and unambiguous transfer pricing documentation is of great importance because it will better support inter-company transactions while avoiding further scrutiny by the SENIAT and the long and expensive processes of a transfer pricing audit.

Managing the audit process

The procedure for determining income tax that the SENIAT must follow on transfer pricing matters, and the means for taxpayers to challenge the assessment issued by the SENIAT, are similar to those available for other tax proceedings. However, periods of time are longer for transfer pricing issues. On transfer pricing matters, the SENIAT must follow the general audit procedures established in the OTC for national taxes. The administrative proceeding concludes with the resolution, which the taxpayer may proceed against by either filing hierarchical appeals or proceeding directly with a tax litigious appeal before a tax court. If the court decision is unfavourable, the taxpayer may file an appeal before the Supreme Court of Justice, whose decision is final. A final decision normally takes from seven to 12 years on average from the moment the audit begins to the last resort decision.

Tax amnesty is only provided for in Article 53 of the OTC, which establishes that the obligation of tax payment can only be reduced or waived by a special law. Other obligations such as interest and fines can only be waived by the same law or by administrative rules.

Competent authority cases of double taxation can be accessed according to the tax treaties signed by the Venezuelan Government.

Figure 1
Germany	Spain	Kuwait	Sweden
Barbados	United States of America	Norway	Switzerland
Belgium	France	Netherlands	Trinidad and Tobago
Canada	Indonesia	Portugal	Cuba
China	Iran	United Kingdom	Brazil (in process)
Korea	Italy	Czech Republic	Russia (in process)
Denmark

Venezuela has entered into double taxation treaties with countries listed in figure 1.

The majority of the treaties signed by Venezuela contemplate the possibility of applying a corresponding adjustment.

Article 114 of the VITL allows Venezuelan taxpayers to file a complementary annual tax return following a transfer pricing adjustment in countries with which Venezuela has celebrated international tax treaties in order to avoid double taxation. However, such adjustment should be previously approved by the Venezuelan Tax Authorities.

The VITL does not regulate secondary adjustments. However, the OTC includes, in the diverse SENIAT faculties chapter, the authority to eliminate any accessories derived from a transfer pricing adjustment, only if such elimination derives from a competent authority agreement over reciprocity bases. The agreement must be with a country with which a tax treaty has been signed, as long as such country's authorities have given back the corresponding tax without the payment of amounts for a reason or purpose of interest.

The VITL does not specify any provision for arbitration or mediation procedures.

Apart from the known transfer pricing audit on an oil and gas company as mentioned above, there are no other known transfer pricing cases in process.

Trends and perspectives

High audit activity is expected in the near future. Recent transfer pricing information requests have been issued to several companies, specifically in the pharmaceutical, automotive, telecommunications and oil and gas sectors. This inspection surge is an extension of the "Zero Evasion Plan" by means of which the SENIAT is strengthening the inspection of international obligations with respect to imports and exports between related companies.

Furthermore, the SENIAT has been requesting information on customs regarding import and export values, as well as duties. It is expected that the SENIAT will use this information for purposes of comparing the prices used by taxpayers under audit with those used by their peers in the same industry.

The recent reassignment of the SENIAT's TP division into the Inspections Office, together with the enhanced training programs for this division, is intended to give way to new TP audits through in-depth reviews and the enforcement of taxpayer obligations.

Ronald Evans
		Baker & McKenzie in Venezuela Tel: +58 212 276 5093 Email: ronald.evans@bakernet.com Ronald Evans is a tax partner in Caracas, Venezuela. His main practice areas are: international, federal and local taxation, tax planning, trust, probate and estate planning. He graduated from the Central University of Venezuela (JD 1990, master's in Tax Law 1998, doctor of law, pending thesis). He also pursued studies at Harvard Law School (LLM 1993, ITP Certificate 1993). Ronald has been named as one of the top five Venezuelan lawyers under the age of 40 by Latin Lawyer magazine (2004). He is a contributor to Venezuelan and international newspapers and journals, with over 100 articles published and two books on taxation matters with McGraw-Hill. Ronald served as Director of International Affairs with the Venezuelan Tax Administration from 1994 to 1996, where he negotiated several of Venezuela's double taxation agreements. He was chairman of the Venezuelan Finance Law Association (1999 to 2004) and chairman of the International Taxation Chapter of the Venezuelan Tax Law Association (1999 to 2004). He is now head of the Tax Committee of the Venezuelan-American Chamber of Commerce (Venamcham).

Gustavo Sánchez
		Baker & McKenzie in Mexico Tel: +52 55 5279 2900 Email: gustavo.sanchez-gonzalez@bakernet.com Gustavo Sánchez joined Baker & McKenzie in 2004 and was responsible for Baker & McKenzie's transfer pricing practice for Venezuela until 2006. His practice includes transfer pricing compliance and consulting applicable to several industries. Gustavo is an economists who graduated in 2002 from the Universidad Autónoma de Nuevo León, as well as obtaining a master of applied mathematics in 2008 from Centro de Investigación en Metemáticas.